The Ontario Superior Court of Justice has refused to allow Toronto-based Birch Hill Equity Partners Management Inc. to reopen a takeover agreement, after the private equity firm discovered that the deal triggered negative tax consequences for certain executives.

Birch Hill sought to retroactively alter the terms of the acquisition of Atria Networks LP by Rogers Communications Inc. in January 2011.

According to the court decision, the Atria acquisition triggered gains on the stock options held by certain Atria executives that did not qualify for the 50% deduction on stock option benefits available in certain circumstances. As a result, the 10 executives were denied total deductions of about $8.5 million on their collective $17 million gain, and are required to pay about $4 million more in taxes than they had hoped to pay, the decision notes.

Birch Hill sought to revise the documents employed when the deal closed “so as to create an entirely different structure that would, they hope, enable the 10 executives in question to improve their chances of claiming the deduction that Canada Revenue Agency has denied them,” the court decision states.

The decision indicates that Rogers didn’t object to the application, nor did the Attorney General’s office (representing the interest of the Minister of Revenue).However, the court ruled that Birch Hill cannot reopen the deal, under the so-called ‘doctrine of rectification’.

“The doctrine of rectification is not an all-purpose tax planning time machine to substitute the transaction a party would have preferred to have done for the one that was actually carried out,” the court decision states.”Rather, it is available subject to very strict limitations to correct genuine and demonstrable mistakes … Rectification is neither an insurance policy nor a guarantee of achieving any particular desired outcome when faced with fiscal authorities.”

“The employee option tax structuring issue was at best peripheral and marginal to the overall transaction (involving only a small fraction of the gross purchase price of approximately $425 million),” the court decision states.

“The relief requested would have the non-party executives be retroactively deemed by way of “rectification” to have entered into a transaction that never occurred five years ago with a party they never had direct dealings with in order retroactively to avoid a tax issue that has emerged after the fact and was given little to no attention at the time,” the court decision states.”Finally, the requested rectification would answer only one of the objections raised by the CRA and thus may have no impact at all on achieving the intended tax objective.”

The court concluded that the “application layers too many legal fictions upon each other to fit within equitable doctrines whose application ought to be rare and exceptional.At some point, the bell rings, the pens go down and the parties have to submit their final answer to be marked.”